Elevance Health Inc (ELV) 2003 Q4 法說會逐字稿

PLEASE NOTE THIS TRANSCRIPT HAS BEEN EDITED FOR ACCURACY.

COMPANY DISCLAIMER Some of the information in this transcript could constitute forward-looking information relating to WellChoice's future financial or business performance and reflect management's views as of February 11, 2004.

Forward-looking information is based on management's estimates, assumptions and projections and is subject to significant uncertainties and other factors, many of which are beyond the company’s control.

Important risk factors could cause future results to differ materially from those estimated by management.

Those risks and uncertainties include but are not limited to: the company’s ability to accurately predict health care costs and to manage those costs through underwriting criteria, quality initiatives and medical management, product design and negotiation of favorable provider reimbursement rates; the company’s ability to maintain or increase the company’s premium rates; possible reductions in enrollment in the company’s health insurance programs or changes in membership mix; the regional concentration of the company’s business; the impact of health care reform and other regulatory matters; the outcome of litigation; and the potential loss of the New York City account.

For a more detailed discussion of these and other important factors that may materially affect WellChoice, please see the company’s filings with the Securities and Exchange Commission, including the discussion of risk factors and historical results of operations and financial condition in its Annual Report on Form 10-K for the year ended December 31, 2002, its Quarterly Reports on Form 10-Q for the three months ended March 31, 2003, June 30, 2003 and September 30, 2003, and its Annual Report on Form 10-K for the year ended December 31, 2003 to be filed with the Commission.

This transcript is included on this website for historical reference only, and has not been updated.

You should consider the information to speak only as of its date of original publication.

WellChoice does not assume any responsibility to update the information to reflect subsequent events.

Good afternoon, ladies and gentlemen, and thank you for standing by.

Welcome to the WellChoice fourth-quarter 2003 earnings conference call.

As a reminder, today, Wednesday, February 11th, 2004, this call is being recorded.

All lines have been placed on mute to prevent any background noise.

There will be a question-and-answer session at the conclusion of the speakers' remarks. (OPERATOR INSTRUCTIONS).

Thank you.

At this time, I would now like to turn the conference ever to Deborah Bohren, Senior Vice President of Communications.

Ms. Bohren, you may begin.

Thank you, and good afternoon, everybody, and welcome to WellChoice's fourth-quarter and full-year 2003 conference call.

Joining me today are Mike Stocker, President and CEO of WellChoice, and John Remshard, Senior Vice President and Chief Financial Officer.

On today's call, we will be making some forward-looking statements.

Forward-looking information is based on management's estimates and projections and is subject to significant uncertainties and other factors, many of which are beyond the Company's control.

Listeners are cautioned that there are factors that could cause actual results to differ materially from our current expectations.

For a detailed discussion of these and other risk factors, please see the Company's filings with the Securities and Exchange Commission, including the risk factors contained in WellChoice's Form 10-K for the year ended December 31st, 2003, to be filed shortly with the Securities and Exchange Commission.

Now, I will turn the call over to Mike for some comments about our 2003 performance, after which John will discuss our financial and membership results in more detail before we go to questions.

Mike?

Thanks, Deb.

It was a good quarter for both earnings and growth, and it was a good January, also, and we'll talk about that.

First, earnings.

For the fourth quarter, we reported net income of $52.6 million or $0.63 per share, and full year, we're reporting net income of $201.1 million or $2.41 per share.

This is $0.01 above the upper range of our guidance, and 1 penny ahead of the First Call mean.

We're also raising the upper range of our guidance for 2004 earnings by 1 penny, and now expect earnings per share for this year to be in the range of $2.75 to $2.80 per fully-diluted share.

This is based on 83.8 million weighted-average shares outstanding.

We also expect earnings for the first quarter of 2004 to be in the range of $0.66 to $0.70 cents per fully-diluted share.

I'm going to turn now to membership growth.

Overall, corporate membership grew 3.2 % to 4.8 million as of the end of 2003.

Our core commercial managed care products -- this excludes the New York City and New York State accounts, and when I say core commercial managed care products, that means that we exclude New York City and New York State accounts.

If we say commercial managed care products, that means we include those accounts.

Anyway, our core commercial managed care products increased 14 % since year end 2002.

That's 282,000 net new members, to just over 2.3 million members.

As for the fourth quarter, our core commercial managed care segment also increased 1 % sequentially, or 23,000 members since the end of the prior quarter.

Self-funded membership increased 12.1 % per year, year over year, and now represents 36.5 % of our total enrollment.

The increase was primarily driven by continued growth in national accounts, which grew by 107,000 members net new as of January 1, 2004.

A few words about January 2004 in general.

In 2004, corporate membership grew 2.5 %, and our core commercial managed care membership grew 6.6 %.

That includes the 107,000 national account members.

We are reconfirming our initial membership guidance that we provided at our last conference call of 3 to 4 % overall corporate membership increase in 2004.

In addition, we anticipate that core commercial managed care membership will increase 9 to 11 % in 2004.

Now, a couple updates since our last conference call.

First, the New York City account.

Unfortunately, there is no new news.

Just to recap previous conversations, we have negotiated rates which are consistent with our expectations through June 30th of 2004.

We believe this account, which is out to bid and has been out to bid for over two years now, will resolve the bidding process during the first half of 2004.

A couple words about Medicares+ Choice.

As we had previously announced, the Medicare Reform Act substantially changed the premium payments and benefits for our Medicare + Choice product in our marketplace.

In Westchester and Rockland counties, we had had a premium of $95.

We have changed that premium to zero.

So we will have zero premium in both of those counties.

In Nassau and Suffolk County, we had a $140 premium previously in both counties.

In Nassau County, we're reducing the premium to $22.

In Suffolk County, we're reducing the premium to $62.

In New York City, where we already have zero premiums, we reduced inpatient and ambulatory surgery copayments by $100 and increased the cap on brand-name drugs from $750 to $1,350.

It's still too early to project what impact the premium and benefit changes will have on membership, although we do not expect any impact on earnings.

Finally, just a few words about the Company.

First, we have a huge advantage in this marketplace.

I think it's borne out by the results, and having the Blue Cross and Blue Shield marks with its tradition in New York City and upstate New York.

Second, we have a strong competitive advantage, because we have a broad array of products and a very diverse customer base.

Third, we have an extremely disciplined approach to managing medical costs, and it's set upon a very strong technical foundation.

We also have a proven track record of responding to and meeting marketplace demands.

Finally, and probably most important, we have a very smart, dedicated, innovative and good-looking management team that differentiates WellChoice from the competition.

With that, I'm going to turn the call over to John.

You said good-looking, Mike?

Thank you, Mike.

Some more than others.

As noted in our press release, WellChoice reported net income for the fourth quarter of 2003 of $52.6 million, or $0.63 per share.

For the year, we are reporting net income of $201.1 million or $2.41 per share.

Both the fourth-quarter and full-year results are one cent higher than the First Call mean.

Before we discuss the result of our operations, we would like to note the impact that taxes have on comparisons of 2003 administrative expenses to the prior year fourth-quarter and full-year results.

Our conversion to a for-profit entity added $16.6 million to premium and sales and use taxes to our administrative expenses in the fourth quarter of 2003, compared to $6.8 million in the fourth quarter of 2002.

For the full year 2003, premium and sales and use taxes were $70.5 million, compared to $9.2 million inthe prior full year.

As Mike pointed out, we're pleased with our fourth-quarter results.

We continue to see stable claim trends, combined with strong core commercial managed care membership growth.

In general, the same factors that we have been highlighting throughout the year are still very much in place.

First, revenue increases resulting from growth in self-funded accounts.

Second, disciplined pricing.

Third, stable claims trends, especially for our commercial managed care products.

And fourth, good expense control.

We report our membership as two business segments.

Commercial Managed Care, which includes our network products, and Other Insurance Products and Services segment, which includes our indemnity and individual products.

We then break our Commercial Managed Care businesses into two components, the New York State and New York City PPO accounts and our core commercial managed care membership.

Core commercial managed care membership excludes the city and state PPO accounts, but includes group PPO, HMO, EPO and other membership/ancillary, which is primarily, ancillary and dental.

Our core commercial managed care membership, as Mike pointed out, grew by 14 % to 2.3 million members as of December 31st, 2003, compared to the prior year end.

Membership for the commercial managed care segment as a whole, which includes the New York State and New York City PPO enrollment, grew by 7.9 % to 4.1 million members as of December 31, 2003, compared to the prior year-end.

Total corporate membership grew by 3.2 % to 4.8 million members as of this year-end, compared to the prior year.

You'll note this is slightly above the high end of the guidance range we provided at the end of the third quarter.

Membership in our Other Insurance Products and Services Segment declined by 19.3 % to 648,000 memberssince year-end 2002, due in part to the loss of a large hospital-only national account, which I prepared and briefed you on this during our third-quarter conference call.

This is still consistent with our strategy to convert members -- to convert indemnity members to managed care.

I'll point out that the large hospital-only account which we lost, which I previously reported, was an indemnity-based account.

Since the prior year end, our small group and middle market membership grew to 440,000 members, a 12.7 % increase, driven primarily by strong HMO growth.

Our national account membership grew to 1.1 million members, an 8.7 % increase from prior year end.

Since last year, self-funded membership increased 12.1 % to 1,736,000 members as of December 31, 2003.

Self-funded membership now represents 36.5 % of our total membership, compared to 33.6 % at year-end 2002.

This increase was largely driven by strong membership growth in national account business.

Total corporate insured membership decreased by 42,000 members since year end 2002, to 3,018,000 members, as a result of a shift of several large accounts to ASO, and decline in our Other Insurance Products and Services segment.

However, I would like to point out that our core commercial managed care membership did increase by 23,000 members, or 1 % sequentially since the end of the third quarter.

Growth in our small group and middle market segments drove this increase.

Total corporate revenues were $1.4 billion for the quarter ended December 31st, an increase of approximately 7.3 % over the prior year's fourth quarter.

Total revenues in our Commercial Managed Care segment increased by 11.7 % over the prior-year fourth quarter to $1.1 billion, while total revenue in our other Insurance Products and Services segment decreased by 9.6 % to $236.4 million.

Total premiums for our core commercial managed care business, which, as Mike pointed out, excludes the New York City and New York State PPO accounts, grew 9.6 % over the prior-year fourth quarter.

Premiums for our managed care business, including the New York City and New York State accounts, increased by 11.6 % to $1.06 billion compared to the fourth quarter of 2002.

These increases were partially offset by an 11.5 % premium decline in our Other Insurance Products and Services segment.

Insured premiums for all segments increased to 1.3 billion for the fourth quarter, which is a 7.4 % increase over the prior year.

For the fourth quarter, self-funded membership increases generated strong service fee revenue growth of $11.9 million or 12.2 %, compared to the prior year.

This was especially true in our commercial managed care segment, where service fees for the quarter increased by 20.7 % over the prior year.

For the full year, in our core commercial managed care products, insured premiums increased by $190.9 million over the prior year, and now totals $2.55 billion.

Core commercial managed care premium yields, which is a change in premium per member per month, was 10.6 % for the full year 2003.

This is a number which is very much in line with our 2003 guidance, which we previously provided .

In sum, premiums and service fees in our most profitable segments continued to grow, due to increased self-funded membership, higher premium yields on our insured business and increased membership generally in our core commercial managed care products.

For the medical loss ratios through year end, we continued to see ratios which are very consistent with our expectations.

Medical loss ratio for the full year 2003 is 85.4 %.

This is essentially flat, when compared to the prior year.

For the full year 2003, the medical loss ratio for our core commercial managed care products, which, once again, excludes the New York City and New York State PPO accounts, was 82.1 %, about 50 basis points higher than the prior year of 81.6 %, which is generally what we have expected.

Sequentially, our core commercial managed care products medical loss ratio for the fourth quarter improved by 160 basis points to 81.4 %.

For the full year 2003, the core commercial managed care reported change in PMPM claim costs is 11.2 %.

Our current pricing uses medical trend rates in the 11 to 13 %, which depends largely on the product.

Fourth-quarter results include $300,000 of net favorable prior-period claims development, in our prospectively rated business.

Now, I just want to point out one thing.

During the course of the year, we have been pointing out that the levels set can create expectations that the amount of PPD (ph) that you are going to see is declining.

Last year was much higher, primarily because of two factors.

One, the HMO business, which was significant, which we wrote at the end of 2001, which allegedly would have a higher loss ratio, and we held higher reserves for that.

It did not; it trued up in loss ratios in the mid 70's.

The second was we have consistently said that in 2002, we expected a rebound as a result of a claim fall-off subsequent to 9-11-2001.

It didn't happen.

Consequently, those reserve releases during the latter part of that year were pushed down -- actually, the PMPMs -- and create a significant amount of prior-period favorable development.

As we get into 2003, we expect to see that fall off during the year.

And we have said in prior conference calls that this is exactly what is happening.

Turning to days claim payable, our days claim payable decreased by 2.6 days to 52.1 days in the quarter ending December 31, 2003, from 54.7 days in the prior quarter, ended September 30, 2003.

I'll point out that recognition of a benefit from the New York State Stabilization Pool for prior years was reported in the third quarter of 2003, and that accounted for 1.8 days of this decrease.

In addition, some of the decrease was caused by the fact that we had one additional hospital claim processing day in the fourth quarter compared to the third quarter.

Overall, we see our days claims payable essentially flat at around 52 days and a fraction going back to last year.

For the fourth quarter of 2003, administrative expenses decreased by $2.4 million, compared to the fourth quarter of 2002 to a total of $216 million.

For the full year 2003, administrative expenses increased by $43.6 million compared to the prior year, and totaled $876.7 million.

For the full year, as a % of premiums plus service fees, the administrative expense ratio is 16.5 %.

This is in line with our expectations, and 40 basis points better than the full year of 2002.

Once again, due to the increasing significance of our self-funded business, as a proportion of our total business, expense ratios using premium equivalents allow a more clear comparison between periods.

Premium equivalents are the sum of premiums, service fees and paid claims attributable to our self-funded business, for which we provide a range of service, including claim administration and membership and billing services.

On a premium-equivalent basis, the administrative expense ratio for the full year 2003 showed a 90 basis point improvement, and was 10.6 %.

This compares to 11.5 % on the same basis for the full year 2002.

Cash flow from operations was $295 million for the full year of 2003.

Total stockholders' equity ended the year at $1.432 billion as of December 31st.

This is an increase of $196 million, or 16 % from the prior year.

WellChoice continues to have no debt on its balance sheet, and we have available a $100 million revolving line of credit.

As of December 31st, 2003, total investments and cash and cash equivalents of WellChoice, the parent holding company, was $363.2 million.

The standalone condensed balance sheet of WellChoice, Inc. is presented in Schedule II of the supplemental schedules to our financial statements, which will be available to you tomorrow.

The statutory surplus of our insurance subsidiaries exceeds both the Blue Cross/Blue Shield Association's capital requirements, as well as the applicable New York and New Jersey statutory reserve requirement.

Investment income and realized gains or losses decreased for the year by 4.4 million, and totaled $63 million compared to the prior year.

Finally, I would also like to point out for those of you who do not actively follow the Company since this IPO that this is the last quarter that our results are compared to 2002, when we had significant tax adjustments related to our conversion to a for-profit Company.

Now, this basically concludes our review of 2003 operating results.

I'd like to now point a little detail on our guidance for 2004.

As Mike said, we expect earnings for the full year 2004 to be in the range of $2.75 to $2.80 per fully-diluted share, and this is based on 83.8 million average shares outstanding.

For the first quarter of 2004, we expect earnings to be in the range of 66 to 70 cents per fully-diluted share.

We expect our corporate medical loss ratio for the full year to be in the range of 85.5 % to 86.5 %.

The medical loss ratio for the full year for our core commercial managed care business is expected to be in the range of 82 to 83 %.

Our administrative expense ratio is also expected to improve, and be in the range of 15 to 16 %.

Total membership growth expectations for 2004 are in the 3 to 4 % range.

Membership in our core commercial managed care product is expected to continue to grow between 9 and 11 %.

Cash flow from operations for 2004 should be approximately $300 million.

And, as Mike said, we had a strong January 2004, compared to the prior year.

We achieved total corporate membership growth of 2.5 %, and growth in core commercial managed care of 6.6 %, and added approximately 107,000 new national account members.

This is the end of our fourth-quarter comments, and I will turn the meeting back over to Mike.

Any questions?

(OPERATOR INSTRUCTIONS).

William McKeever, UBS.

Congratulations on the quarter.

I was wondering -- I believe right now you are in the process of the filing your plans for Medicare.

Can you share with us what expansion you might have in your Medicare in the counties where you're operating now?

Hi, Bill.

I have to say you are breaking up a little bit.

I got the question, but it's not great quality.

We actually never withdrew from any of the counties that we were in, and we do not plan to expand beyond the current counties.

So we always were in Rockland, Westchester, the five boroughs and Nassau and Suffolk.

So we are not expanding into new markets.

On the other hand, we never withdrew from any, either.

And then, if you wouldn't mind going through the cost trends by category, and what you think -- it sounds as if '04 is going to be very much like '03 for the cost trends.

Yes; our cost trend for '03 was about 11.2 %, and that was broken down pretty much evenly between utilization of 5.5 and cost and unit cost of about 5.4.

Now, if we go into that by component, what we saw for inpatient, inpatient and drug was probably the driver.

Inpatient, we saw utilization fairly flat with less than 0.7 %.

But on a unit cost basis, and this is the function of contracting, about 10.9 %.

For medical, medical was a fairly even split, at a low 5.8 % in total, with about 3.3% for utilization and about 2.4 %for unit cost.

Drug is always difficult to deal with, in terms of breaking down utilization and unit cost.

But we think it was about 11 % for unit and about 1.2 %, relatively flat utilization, giving us a composite trend for drug for the year at about 12.3 %.

All this came out within our expectations for both pricing and trend, and it's not something we see that has radically developed or radically changed over the last three to six months.

John Rex, Bear Stearns.

A couple of questions.

First, I just wanted to review the membership numbers you laid out for January.

Correct me if I'm wrong here -- 2.5 % total, 6.6 for core commercial.

And what was the small -- and if those numbers are correct, did you give a number for -- can you break out a number for small group, also?

No, John.

We didn't break out a number for small group.

I guess you gave a full-year '03 gain in small group; is that correct?

No.

Okay.

There was no small --

But you do have the %age increases correct.

What we did is we talked about growth in the middle market.

We had a number in there for the middle market in our prepared remarks.

But those other numbers for January '04 are correct?

Yes, 2.5 % overall and 6.6 % in core managed care.

And the question on the other insurance products and services in MCR -- what was driving the big jump there?

Usually, that seems to earn considerably more than the $3.5 million pretax or so it earned in the quarter.

Do you mean jump from quarter to quarter?

Yes, the sequential jump.

Don't forget that in the third quarter, there was a significant depression of the medical loss ratio, primarily in that segment, coming from the $38 million we received from the Reg 146 pool funds, and that gets applied as a direct reduction of loss payments during the quarter in which it is received.

So, since that was primarily all in the individual and other insurance and services segment, it bumps that down.

And that shows a significant depression, so you see a huge improvement in the third quarter and a deterioration in the fourth.

But it's not a true deterioration; it's just a return to sort of normal levels.

But even the year-ago number was 75.8 % versus the 87.6 % this quarter.

I mean the year-ago number was closer to what you showed in the September quarter, the 71.9, in terms of the MLR.

And if I look at your full-year MCR -- it just looks strikingly higher than you have typically shown in that category.

And I am wondering if there's any kind of one-timers going through that.

I've never seen it near 90 %, or at least not lately.

You'll see that segment bounce around sometimes for a quarter, but for the full year, for our other insurance products and services segment, for 2002 was 82.4 %, and for 2003 -- or 82.4 for '02 and 82.7 for '03.

So it was kind of consistent.

So you are saying it's something utilization or something in that category?

I'm trying to understand.

Normally, you would post more than $3.5 million in pretax from that.

What changes the quarter-to-quarter numbers for that segment is that segment is very vulnerable to changes coming from pool funds.

Whenever you have a settlement to state on a prior-year pool fund for the Reg 146 subsidy pools, that will change for the quarter.

So you're going to see, like you did in the third quarter of this year, a dramatic shift for a quarter.

But those type of payments are fairly consistent from year after year, and so I think the loss ratios look rather stable.

So you're just looking at more of the year-over-year than the quarter but nothing unusual that drove the earnings down to that level?

No.

There wasn't anything notable, there wasn't anything significant, in terms of the business mix or the change, no.

There wasn't anything in the fundamentals.

It's all the timing and the regulatory money.

And what are you targeting for net premium yields for '04 now?

I don't think we have put out a number for '04, but if we go through '04 guidance in a little bit of detail, like I said, 3 to 4 % for membership.

And we are really looking -- and this is a key point for us, a key point with pricing and a key point in the fact that those of you know it's very data-centric Company when it comes to monitoring trends and inflection points of the curve.

We see the medical cost trend, as well as premium yields, to be stable at about the 8 to 10 % level for 2004.

And this is consistent, at a different level, with what we've seen this year.

And that ties into what we see in the medical loss ratios also.

So our pricing guidance would be like 11 to 13 %.

And remember, our PMPMs for premium yield is all in.

It's an all-in number, which includes the indemnity stuff as well as the managed-care stuff.

And we see that coming in at about 8 to 10 %.

So about 300 basis points of buy-down going on?

Well, yes.

It's hard to estimate, but we've been saying 200 to 300 basis -- well, about 200 basis points.

But don't forget, we've got 27 products out there, and it's a function of mix.

So, if you say you're essentially pricing to the 11 to 13 % medical cost trend assumption that you have for '04, but anticipation of some buy-down there, getting you to the 8 to 10 % yield level?

That's correct.

And don't forget, we have another element of buy-down in there, having introduced -- this will be the first full year with the POS products out for large and small groups.

And that gives another buy-down capability for benefits.

And can you give what was the full-year reserve development?

Full-year reserve development was -- let's see.

We had favorable development of $300,000 in the fourth quarter.

You've probably given -- I think you've given it quarter by quarter, so I can add it up.

Yes.

If you add it up, I think the total reserve development during the year was about $40 million.

And you'll see it tail off from first to fourth.

And just lastly, can you give us any color of what kind of enrollment you see in your small group product that you rolled out midyear?

I think the only thing we can say -- are you talking about our POS product?

Yes, yes.

The only thing we can say about that -- we don't break that number out separately, but we did come out with pretty aggressive enrollment targets that were heavily debated internally, and we met the targets.

And the growth also that is mixed in with what Mike pointed out for the first month of the year is also strong.

So I would say that our folks, in terms of design and broker education, did a good job.

And any general comments on the renewal pricing market in New York City, not so much your own but what you're seeing from competitors, whether on the margin you view it as more competitive or less competitive than this time last year?

We see real competition, but we always have.

When I think of the fierceness of the competition, you know, I read all your reports, I don't see any market difference between this year and this time last year.

I also -- you hear anecdotal evidence, particularly on the larger middle market groups, about a company here and there that will try to go after a particular account.

But in general, the pricing does not seem to be irrational to us.

Charles Boorady, Smith Barney.

A few questions.

First, can you explain the uptick in other expenses in the quarter sequentially?

It was about $2.5 million versus $0.5 million in the third quarter.

It looked like it had been -- looking back over all the previous quarters that I have, it has been in the plus $0.5 million, minus $0.5 million range, except for the first quarter of '02.

The only thing you see in the third quarter -- we have rent, we have --

For fourth quarter.

I'm sorry.

No, no.

Starting in the third quarter, we started moving people at the end of the third quarter, in September.

And we had higher rent in the fourth quarter.

The only thing that was unusual, that you'll see in other expense in the fourth quarter -- I think you said 2 million?

2.5, yes.

We had about 1.7 million in terms of additional expense related to the settlement that we pointed out in the third quarter, with some old hospital claims.

We've had old hospital claims that were presented which caused a little uptick in our MLR, and we had about $1.7 million worth of costs associated with settling that out.

That's in the fourth quarter.

That's the only other thing.

That was put in other expense line item?

Yes.

As opposed to the medical expense?

It wasn't medical; it was administrative cost.

There was a lot of work involved in sorting out their multiyear claims, (multiple speakers) would be repriced.

We put that in admin, and that was that 1.7 million.

So would you consider that to be non-recurring, or would I --?

Yes, definitely.

So, to get a real run rate for the fourth quarter, I could pull out that 1.7 pretax?

Yes.

And were there any medical-related expenses tied to that, that I should pull out to get a better ongoing run rate number on the med cost line?

During the third quarter, when we reported the medical cost, we said it was about $10 million, between $9.5 and $10 million.

That was the total net medical cost.

And what quarter did that show up --?

Third quarter.

And was there any residual, I guess I'm asking, in the fourth quarter that was also booked related to this?

No, no.

So the admin expense was a fourth-quarter hit, but the medical expense was mostly a third-quarter hit?

No, we made all the estimates on the medical expense, which we think we had a handle on in the third quarter.

But we got all the bills and got all the admin, all the settlement costs sorted out in the fourth.

I got it.

I understand.

Next question.

On the '04 guidance, the high end of your range, $2.80, and the high end of the first-quarter range is 70 cents.

And if you did 70 cents each quarter, that would get you to the $2.80.

I'm just trying to understand the seasonality.

Is it conceivable that you would have a flat sequential first, second, third and fourth quarters?

Is it conceivable?

Yes, sure.

We've had pretty consistent -- we have pretty consistent earnings this year.

You adjust for the catch-up in the second quarter over the state imposing an additional 700 basis points in their premium tax.

Okay?

I thought our earnings were exceptionally consistent.

Is it possible?

Yes.

We still maintain that we don't see any big health cyclicality in our business.

What about leap year in the first quarter?

Is there an extra -- it's turning into a joke today, but a bad one.

There's an extra day of expense, but the same revenue.

Doesn't that cost you more money in the Q1?

It will affect more of your days claims payable than anything else.

Okay, but you're not going to accrue -- isn't there a real extra day of people incurring medical expenses in '04?

Yes, there is.

Does everybody get a free day of health insurance in '04?

We figure that into our rates, but yes, it is.

So the answer is it's figured into your rates?

It is figured in.

We had it.

Got it.

And the seasonality, in terms of the Q1 year over year -- would it look a little different with the extra day, or not materially?

No, not that much.

I mean, what we've said in the past is Q1 always looks a little bit stronger than Q2, because of the new business put on and the time it takes it to catch up with the claims.

This year, as you pointed out, you've got the extra claims day in Q1.

And that might just sort of even that out, so it's very possible that you'll see a flat Q1 and Q2, given the unusual strong Q1 that has been historical, but without an extra day in February.

On the tax rate, which in the third quarter came down, and the guidance -- you said that was a third-quarter issue, and the full year would be about 42 %.

But it was still kind of flat, at a little over 40 in the fourth quarter.

What should we expect for '04?

Was there anything unusual in the fourth quarter of '03 in the tax rate?

What really governs the tax rate into '04, and we have a good handle on it now, is basically the membership.

As you are aware, the insurance company and the HMO are taxed differently.

The insurance company pays a premium tax, the HMO does not.

Therefore, the HMO pays a variety of other state franchise and income taxes.

So your business mix between the Article 42 and the Article 44 Company will generate a difference in your effective tax rate year over year.

It doesn't have anything –to do with federal given the change in our mix and the way we are seeing it for 2004, we can guide you to an effective tax rate of 39 % for the year.

39 for the full year '04?

39 for the full year.

And this is sort of something that we anticipated in our plans, but we wanted to wait to see how the membership developed, before we --

And that change is purely related to the mix change that you just described?

Yes, it is.

There is no fluctuation change in federal, and the only change in has to do with where your memberships lodge, between the HMO and the insurance company.

Last question on Medicare is part of your approval to convert.

I recall some provisions, or some agreed-to provisions related to Medicare that New York State agreed to with you, although I don't have the specific details in front of me.

But can you remind us generally what those are, and does the change as a result of this Medicare bill relieve any pressure on you with respect to those provisions?

No.

Actually, there's no restriction put on it as part of our conversion or restructuring, with regard to the Medicare +s Choice HMO product.

The limitation that was part of the restructuring arrangement with the state had to do with the Medicare supplemental coverage, and what it did to the Medicare supplemental coverage is said that going forward, we would use the same rate restrictions that we would as an Article 43 Company, which is, in order to get an increase greater than 10 %, you would have to go to a rate hearing; you would have to have prior approval.

I see.

And does the fact that the Medicare Choice product look more attractive now take any customers away from the Medicare supplement product and relieve any pressure there, or does it exacerbate the potential issue?

I don't know that it would do either.

We don't typically see a big swap between supplemental and HMO.

We looked at this previously, and we really didn't see -- we just didn't really see much relationship between the enrollment in one product and enrollment in the other.

So really no impact that you see there, but now potential to grow enrollment more as a result of the more attractive Medicare Choice zero premium offering.

Did you give an enrollment guidance number for Medicare for '04?

No.

And we already said this, but it's really too early to tell, but we don't think it's going to change our guidance any.

James Lin of Greenlight Capital.

I was wondering if you can give me the yield on the investment portfolio, weighted average yield.

We can get back to you in a few minutes on that.

We'll have to look it up.

Is there another question?

Yes.

Did you say you had $363 million of free cash available?

I didn't quote free cash.

I have to stick with -- we are sticking with the GAAP disclosure numbers.

And I said, for the parent company, I think it was $363 million in cash and cash equivalents.

And that's at the parent company, right?

Yes.

At WellChoice.

And the duration on the portfolio, as well -- is it still roughly three years?

3.1 years.

The duration is 3.1 years, and the rate of return for the year is probably about 2.73 %, probably it was 2.73 %.

And that includes the investment of roughly $1.4 billion and then the cash, right?

That's all in, yes; that's everything.

So it's roughly off the $2 billion?

Yes.

Adam Miller, Williams Capital Group.

I have two quick questions.

First, the new share count for 2004 is going up slightly.

Is that due to incentive plan design, or anything else?

It's due to the fact that options and restricted stock (indiscernible) were permitted to be awarded at the first anniversary of our IPO, which was November 7, 2003.

And what it recognizes is the vesting in -- and the dilution of that in 2004.

Also, you had a net loss for other income for the fourth quarter of $2.5 million.

Can you just explain or describe what is that (ph)?

That is what we just explained.

The biggest part of that was the $1.7 million in administrative costs that we incurred.

And can you talk a little bit about any plans for consumer-directed health plans, or HSA legislation moving forward?

I'll talk about that.

It's an opportunity, and we are looking into it, actually, quite actively and seriously, both in the group and in the individual marketplace.

You will hear more about that in the future.

Mark Giambrone - Barrow, Hanley, Mewhinney & Strauss, Inc.

I hope I didn't miss this in your prepared remarks, but can you comment on your use of cash flow, and how you think about the redeployment of that cash?

Yes, we can comment on it.

We are not anticipating -- we have been asked that, since we are producing a fair amount of cash coming from our profitability, we are aware of our responsibility to our shareholders, and we have a number of issues that we would consider, which would include dividends; it would include stock repurchase, as well as other comments that Mike and I have both made in the past concerning our desire to increase the footprint of our business empireand look at acquisition opportunities, either in our business or in related businesses.

And we are doing that; we are making that evaluation.

Not to put a timing on an acquisition type discussion, but are you thinking about timing from an announcement of either share purchase or dividend that we could think about or look forward to?

No.

We have not made any recommendations internally yet or to our Board.

Jefferson Lignelli, Stonebrook Fund Management.

Congratulations on a good quarter.

You mentioned you have $363 million of cash at the parent, and then I think you mentioned in '04 you were going to have $300 million of cash from operations.

Based on those numbers, where would you expect the cash at the parent to be at the end of 2004?

It could be as much as $500 million, if we dividended up the maximum each quarter.

Matthew Borsch, Goldman Sachs.

If I could just ask a question on what you are seeing, in terms of the impact from the economy in the New York metro area on enrollment?

Is that having a positive impact now on in-group growth?

I'm going to give a shot at that.

The unemployment rate is slightly better in New York, but not a lot.

And that's kind of just based on what I read in the popular press.

Our kind of experience is that there was a slight but measurable decrease in enrollment, also in enrollment in existing accounts, during the economic downturn.

I don't think there's -- the market in New York is clearly better, but I can't say that we've seen any real difference in that.

And it's been a relatively short period of time since it's been acknowledged that it's better.

I guess what I would say is there definitely was an effect of a downturn in the economy on our business, although not huge.

And you can sense my hesitation, because there's a lot of soft things here that would go into that kind of estimate.

We have not seen, to date, much change in the marketplace, based on what we read about is an improved economy.

And just turning to a somewhat different topic, in terms of what employers are doing, moving from -- or perhaps moving from the fully insured to self-funding, are you seeing that shift continuing within your book of business?

Is the higher premium tax still having an impact on employers' decisions?

And to what extent is that happening in the middle market?

It does not happen at all in the middle market, primarily because -- I think one thing I'd like to point out that is a really good news story for us, and just shows the wherewithal, I think, of Mike's management team -- we absorbed a lot of taxes, okay, and it came in at actually, on an adjusted basis, lower admin ratio than we did the prior year.

So we didn't pass that on; we sort of absorbed that stuff.

The second thing is in pointing out the January growth, and especially in the 107,000 members in national accounts, and this is something that our marketing and sales folks really love to talk about.

You can split that number in half, and say half of that is new business, which we really like.

And the other half is that increased penetration within existing accounts.

We are consistent in the market, and we have good service.

So we're seeing a lot of favorable development.

And I should have said, Mike's good-looking management team.

He's correcting me here.

And so we've seen a lot of positive development in the market, as far as our price and our offering.

And I think that our organic growth has sort of backed that up.

So general improvements in economic conditions are good.

And they can only serve to help us.

But we are doing okay.

You notice he didn't say Mike.

I said Mike's good-looking.

Well, I am not going to comment.

Let me ask one last question on the '04 outlook, which is you're guiding to an 82 to 83 % MCR on your core managed care book.

But the midpoint of that range would seem to be up somewhat from where you came in, at 2003, at 82.1 %.

That's correct.

Is that just conservatism, and you're giving a broad enough range that you feel comfortable with at this point?

No, I think it's real.

And it's not like a margin deterioration.

What we have said -- and this is important for everybody to understand as far as our pricing -- we really did a good job, I think, in noting early what would be the positive development and the PPD everybody saw last year.

We priced consistently with the trend, and stayed stable in the market this year.

Now, when you do the math, and the year-over-year stuff, what you are seeing is you're seeing normalized PMPMs this year, and you're seeing below normal per member per month costs last year, because of all the dilution of the PPD, and especially when you get in the quarter.

So we think we are kind of very consistent on what we expect the trend to be, and we don't expect any significant changes.

Got it.

Okay, congratulations.

And the only other thing I would point out is you have to be aware that the numbers we report are all in, so it's a mix of PPO and HMO, as well as the indemnity line.

That concludes the Q&A portion of today's teleconference.

Gentlemen, do you have any final remarks?

No, we're fine.

Thank you very much.

Thank you for your participation in today's WellChoice, Inc., fourth-quarter 2003 earnings release conference call.

This concludes today's call.

You may now disconnect.